Americans Put More on Credit Cards as Inflation Boosts Costs, Fed Data Show

Americans are putting more on their credit cards and taking out fewer mortgages as they need to increasingly borrow to cover the higher cost of everyday essentials and respond to rising interest rates.

A record 537 million credit card accounts were opened in the first quarter, a jump of 31 million over the past year, according to the Federal Reserve Bank of New York. In the first three months of the year, mortgage originations were the lowest in nearly two years.

While mortgages are still the biggest component of household debt at 71%, the data show how consumers are relying more on credit cards as decades-high inflation increases the cost of everything from food and gas to shelter. As a result of the Fed tightening policy and mortgage rates being the highest since 2009, Americans are less likely to re-finance their loans.

The data shows a stark contrast between the time when Americans took advantage of the lowest interest rates in history to refinance their debt and now. Debt service costs are rising as a result of the Fed hiking rates by the most since 2000 and indicating it will keep doing so in the coming months.

Higher interest payments could tip certain kinds of debt, especially student loans, into delinquency from historically low levels. According to the New York Fed, interest payments are starting to tick up across nearly all debt types, including credit cards, mortgages, auto loans, and home equity lines of credit. The number of foreclosures increased in the first quarter.

Consumers have a record $3.28 trillion in credit card debt.

A separate report last week showed US consumer borrowing soared in March by the most on record as credit-card balances ballooned and non-revolving credit jumped, underscoring the impact of solid spending and rising prices. Spending is the largest contributor to the economy and it could be worrisome if Americans can't keep up with their payments.

Credit-card success eases worry over consumer.

Those payments, as well as others with variable interest rates, are increasing and threaten to squeeze already strained households who live paycheck-to-paycheck.

Consumer prices are expected to have risen in April from a year ago. It is still near the highest it has been in 40 years.

Mortgage originations boomed when rates were low, but have fallen in recent weeks as rates rise. Freddie Mac's 30-year mortgage rate is at the highest it's been since 2009.

The New York Fed researchers said in a separate post that mortgage debt has been rising more slowly than home values.

Homebuyers signal over rates.

The high lending standards that came out of the 2008 financial crisis are reflected in loans going to borrowers with higher credit scores. More than two-thirds of newly originated mortgage debt last quarter was for borrowers with credit scores over 760. The years leading up to the Great Recession averaged 12%.

The third-highest category of debt was autos, thanks to an increase in prices that prompted buyers to borrow more. Even as prices of used vehicles start coming down from their peaks, households may still be stuck with large loan payments.

New borrowers are at risk of owing more on their cars than they are worth because of the drop in used-car prices.

According to the New York Fed, student-loan debt increased at the lowest rate in nearly two decades, as fewer Americans went to college during the Pandemic, and interest payments were cut to zero due to Covid-19 forbearance measures. The pause on payments was extended by the Biden administration.

According to a measure by the Fed, Americans owe almost $2 trillion in student-loan debt.